Industry concerns over Verve fix

FIXING state generator Verve Energy must not be done at the expense of electricity retailer Synergy's ability to underwrite new third party generation, the state government has been warned.

Electricity sector expert Peter Oates last week tabled his review of Verve to stem the $454 million in losses racked up since disaggregation in mid 2006.

The report was used as the basis for the state government's decision not to re-amalgamate Verve with Synergy, on the grounds it would discourage private sector investment and reduce competition.

The report also said increasing electricity tariffs to reflect actual cost was critical to Verve's ongoing viability, as were changes to market rules and the contractual arrangements between Verve and Synergy.

The state government has already begun addressing the tariff imbalance by approving a significant increase over the next three years in a staged transition to cost-reflective pricing.

Similarly, the report recommends sweeping changes to simplify the vesting contract between Verve and Synergy, which it said had burdened Verve with most of the costs and risk associated with disaggregation.

Verve managing director Shirley In't Veld welcomed the findings of the Oates report and said cost-reflective tariffs would substantially improve Verve's financial position.

Revising the vesting contract, particularly the schedule of forced displacement of Verve's capacity as Synergy procures new private supplies, was another sensible step, she said.

Mr Oates' recommendations have widespread support, but industry remains wary of any changes that would simply transfer extra costs to Synergy, potentially damaging its ability to fund new sector investment.

Synergy's procurement tendering has so far underwritten $2 billion in new private generation, and industry is adamant the process must not be interrupted.

Eight groups, including Verve and coal-fired power proponents Aviva Corporation and Griffin Energy, are awaiting Synergy's imminent award of contracts for up to 686 megawatts of new capacity from 2011.

Aviva Corporation managing director Lindsay Reed said safeguarding Synergy's ability to support new private generation investment was paramount.

"What I would say to the premier ... is do whatever you have to do to fix (Verve), but whatever happens, don't let Verve destroy the credit rating of Synergy, which is underwriting the future power investment and energy for all of us in the SWIS," Mr Reed told WA Business News.

WA Sustainable Energy Association chief executive Ray Wills agreed and said Synergy's procurement tendering had been vital in underwriting 200MW of renewable generation since 2006.

"Government, as the sole shareholder in both companies, shouldn't restrain one to try and repair the other," he said.

Instead, Verve's financial position should be improved so that it could also invest in more renewable capacity, Mr Wills said, querying Verve's $100 million re-commissioning of WA's oldest coal-fired plant at Muja.

Synergy managing director Jim Mitchell said the current round of procurement tendering would continue as normal, and the winning tenders would be announced shortly.

Chamber of Minerals and Energy Western Australia director Paul Frewer said government's challenge was to facilitate third-party investment as well as ensure Verve's viability in a competitive energy market.

Aviva's Lindsay Reed said the Oates report also showed that, beyond tariff increases, there was little need to further bend market rules in Verve's favour.

"The market has actually been very good to Verve", he said, noting higher electricity prices, higher supply volumes and lower fuel costs had actually boosted Verve's revenues by $256 million more than forecast over the three year period.

Yet poor plant availability, forced outages, unplanned maintenance, including during the Varanus Island gas disaster, had cost Verve an extra $320 million in that time.

"We don't need to fix the market to fix Verve, it needs to learn to run its plant and make sensible decisions," he said.